08/07/2000

Healthcare Investors Get A Shot In The Arm

By Matthew A. DeBellis
Redherring.com, August 07, 2000

There's nothing like having been there since the beginning.

Early-stage venture capitalists are proudly watching their health-care sector investments grow from infancy to adulthood, as these companies show considerable strength by staging IPOs during an unforgiving time on Wall Street.

In a sector where investors have no choice but to invest for the long term, some VC firms are excitedly watching several portfolio companies make the final leap from startup to public corporation.

"All of us in the health-care sector feel vindicated to have stayed in this space," says Terry McGuire, a founding partner at Polaris Venture Partners, which watched three of its early-stage investments go public this year, including Iceland-based Decode Genetics (Nasdaq: DCGN) on July 18. The three firms are the first of Polaris's health-care companies which make up one-third of its portfolio to go out.

"People were so down on medical [companies] for so long," Mr. McGuire says. "The VC world has been dominated by the information technology sector for the last five years."

WINDOW OPENS

Health care-related concerns began to go public in increasing numbers in the second week of July. That's when five went out, followed by two straight weeks with seven each, according to Commscan, a firm that provides research to investment banks. Only one medical firm decided to postpone its IPO in the first week of August.

The last time seven medical companies went public in one week was way back in January 1997.

And it looks like medical companies will continue their march toward the public market. Ten firms are scheduled to go out the week of August 7, according to Commscan. Ten medical IPOs in one week would rank as the best week for the sector in the ten years Commscan has been tracking the IPO industry.

"It's unbelievable. [Health care] is a fourth of all the IPOs next week," says Frank McGee, an analyst at Commscan. There are 38 expected health-care IPOs for the week of August 7.

Investors in the medical sector say the hospitable public market isn't only good for returns now, but also encourages early-stage VC firms to aggressively fund new startups.

"Early-stage VC firms are likely to have a more positive attitude about startups coming up now," says Jim Bochnowski, a general partner at Delphi Ventures, a health-care-focused VC firm.

A Delphi investment, Rita Medical Systems (Nasdaq: RITA), a medical device maker, went public on July 27. Its shares closed on Friday unchanged from its $12 offering price.

WORTH THE WAIT

"When I make an investment, I assume I won't see a liquidity event for five years, likely more like seven," says Lowell Sears, CEO of VC firm Sears Capital Management.

In 1994, Mr. Sears left his CFO post at biotech giant Amgen and became a VC focused on early-stage investments in life-science companies. Some of his investments are finally going public.

He waited the longest for a return from Dendreon (Nasdaq: DNDN), which develops cancer-treating drugs. It went out on June 16, and the $300,000 investment he made six years ago now is worth $3 million, Mr. Sears says.

Polaris waited several years for its trio of medical IPOs, but it was worth the wait. The early-stage VC firm invested $8.8 million spread over three rounds per company for a total return of $105 million, says John Gannon, Polaris's chief financial officer.

Polaris began investing in Decode Genetics in 1996 and turned a $2 million investment into $45 million. In 1997, it first invested in Aspect Medical Systems (Nasdaq: ASPM), a $4 million stake now worth $20 million. The firm's fastest return on a medical investment is Paradigm Genetics (Nasdaq: PDGM), a $2.8 million investment made in 1998 that is now worth $40 million.

The current spurt of successful health-care IPOs is pushing Domain Associates, a venture capital management company focused on life sciences, toward a nice comeback. The firm had only one portfolio company go public in the last two years Ribogene in 1998. Questcor Pharmaceuticals (AMEX: QSC) bought Ribogene last year.

Already this year, three Domain Associates portfolio companies have gone public, and it's likely that three more will go public by year's end, says Arthur Klausner, a general partner at the firm. The last year it had six companies go public was in 1996, and its best year was in 1997 when seven companies went public, he says.

SPREADING THE WEALTH

Some recent IPO filled the pockets of a bunch of early-stage investors, including Domain.

When Applied Molecular Evolution (Nasdaq: AMEV), a biotech firm that improves genes and proteins for medical purposes, went public on July 27, two early-stage health care-focused firms shared success. Delphi Ventures and Domain Associates both invested in Applied Molecular in 1991, two years after the firm was founded and when it still went by the name Ixsys.

Delphi invested $1 million in Applied Molecular in 1991 and $500,000 in 1993, says Jim Bochnowski, a general partner at Delphi and a director at Applied Molecular. Delphi's $1.5 million investment now is worth approximately $35 million, he says. Domain declined to say how much it invested in its portfolio companies.

Inspire Pharmaceuticals (Nasdaq: ISPH) also brought some early-stage VCs success. It debuted on the Nasdaq exchange on Thursday and closed at $15 per share, up $3 from its $12 offering price. Inspire is developing drugs to help the body defend its mucous-membrane surface against dust, pollutants, bacteria, and viruses.

Domain Associates invested in Inspire in 1995, and Mr. McGuire of Polaris is a prominent Inspire investor. He's been chairman of Inspire since his former VC firm Burr, Egan, Deleage invested in the company seven years ago. The $4.5 million gamble is now worth $45 million, he says.

MORE TO COME

The medical-focused VC firms have more companies approaching IPOs.

Atherogenics (Nasdaq: ARBA), a 1996 Domain Associates investment, is preparing to go public and currently is on the road talking to U.S. investors, says Nicole Vitullo, a managing director at the VC firm. Atlanta-based Atherogenics is a pharmaceutical firm developing treatments for chronic inflammatory diseases such as atherosclerosis, asthma, and arthritis.

Telik, another Delphi portfolio company, is scheduled to go public next week, according to Commscan. The South San Francisco company is developing drugs to treat certain types of tumors and diabetes. Delphi has invested $3 million in Telik since 1992.

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